Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Guangdong Haid Group Co., Limited (SZSE:002311) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Guangdong Haid Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Guangdong Haid Group had CN¥4.74b of debt in June 2024, down from CN¥8.45b, one year before. However, it does have CN¥5.59b in cash offsetting this, leading to net cash of CN¥843.3m.
How Healthy Is Guangdong Haid Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guangdong Haid Group had liabilities of CN¥22.9b due within 12 months and liabilities of CN¥4.81b due beyond that. On the other hand, it had cash of CN¥5.59b and CN¥5.63b worth of receivables due within a year. So it has liabilities totalling CN¥16.5b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Guangdong Haid Group has a huge market capitalization of CN¥78.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Guangdong Haid Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Guangdong Haid Group grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangdong Haid Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangdong Haid Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Guangdong Haid Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
Although Guangdong Haid Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥843.3m. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in CN¥5.9b. So we don't think Guangdong Haid Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangdong Haid Group you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
